Large business tax under consideration increased by 12% in the year to 31 March 2018, up from £24.8bn in 2016-17, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com. Of this, £6.1bn related to transfer pricing, up from £5.8bn last year and just £983 million five years ago.
The time taken to resolve transfer pricing by disputes has also increased in the past year, according to the figures. The average time taken is now 30.4 months, or over two and a half years; up 11% from 27.3 months last year.
'Tax under consideration' is an estimate of the maximum potential additional tax liability across all inquiries, before full investigations are completed, and not the amount actually due, which tends to be around half the original estimate once individual cases are investigated. However, the figures show that HMRC is continuing to scrutinise the tax affairs of big businesses, investigating arrangements that would previously have been seen as perfectly acceptable, according to tax expert Jason Collins of Pinsent Masons.
"The UK's biggest businesses should be prepared for a new wave of HMRC investigations as suspected underpaid tax heads towards £30bn," he said.
"Transfer pricing represents nearly a quarter of the suspected amount underpaid which reflects the hugely complex, multinational structure of the UK's top businesses. It can be difficult for companies operating across multiple jurisdictions to set prices that satisfy all authorities," he said.
Transfer pricing refers to the charges made between different parts of a multinational business for goods, services or intangible assets, including intellectual property. Tax rules provide that transactions between connected parties should be taxed as if they were on arm's length terms. In recent years, multinationals have been accused of arranging their transfer pricing to minimise their tax liabilities in jurisdictions such as the UK.
Collins said that the introduction of diverted profits tax (DPT) in 2015 was giving HMRC a "second bite of the cherry" on transfer pricing disputes. DPT was introduced in 2015 to deter activities that divert profits away from the UK so that they are not subject to corporation tax; for example by way of a tax deductible payment to an associated entity in a low-tax jurisdiction, or through the use of transactions or entities that lack economic substance.
Once HMRC issues a DPT charging notice, the tax demanded must be paid in full and usually cannot be appealed for another 12 months while HMRC reviews the notice. In addition, DPT is paid at 25%, whereas corporation tax is only payable at 19%. Collins said that HMRC often ran transfer pricing inquiries alongside DPT inquiries, as adjusting transfer pricing to pay more corporation tax can eliminate the DPT charge.
"In some cases, DPT is being used to persuade businesses to accept transfer pricing adjustments where they thought they were protected by an advance pricing agreement (APA). Faced with DPT at 25%, many would rather settle for 19% corporation tax," he said.
"Not only are transfer pricing disputes taking longer than ever to resolve but so are applications for APAs, which can protect businesses from HMRC inquiries. These delays are causing unwelcome uncertainty for businesses," he said.
An APA is a written agreement between a business and HMRC, which determines a method for resolving transfer pricing issues in advance of a return being made. APAs do not cover DPT, but HMRC will consider the DPT risk before agreeing to an APA.